The Value of Going Global
Investing in global equities offers Australians potential for long-term capital growth, diversification and complementary exposure to any existing Australian share holdings.
In particular, global equities investing provides exposure to companies, industries, and sectors which are significantly under-represented in the Australian sharemarket. These include technology (incorporating industries such as software, hardware and peripherals, electronic components, semiconductors, data processing, and information technology consulting), luxury goods, ecommerce, and healthcare. This provides potential sector diversification benefits for Australian investors, given that our sharemarket is dominated by financial services and resources companies.
Why Go Active in Global Equities?
A well-designed active approach to investing in global equities investing can enhance potential returns and help manage risk more effectively than a passive or index approach. The Loomis Sayles Global Equity Fund is a good example of this, with an investment approach built around three alpha drivers that the portfolio managers believe are crucial to generating long-term outperformance: quality, intrinsic value growth and valuation. Investing in quality companies that can grow intrinsic value over time, and which trade at an attractive valuation, are key to long-term alpha generation. This strategy has been available to Australian investors since 1 November 2018 through the unlisted Loomis Sayles Global Equity Fund and has delivered a return of +20.0% p.a. to 31 October 2021 since its inception*, above the return of +15.4% p.a. from the Fund’s benchmark the MSCI All Country World Index.
Most traditional index benchmarks are created by ranking companies on the basis of their market capitalisation. This means that index composition is determined primarily by share price movements. This approach can be effective when prices accurately reflect a company’s ‘true value’. As many investors know, however, markets are volatile and share prices frequently do not reflect the fundamentals of the underlying company.
While an index approach must invest in companies with a wide range of risks, an active approach can help avoid companies with the greatest risks, thus offering a degree of ‘downside risk’ protection unavailable from an index approach.
The global macroeconomic environment and geopolitical outlook are always in flux, which presents a challenge for investors to generate attractive return potential from global equities over the cycle. In addition, the global investment landscape is more connected and more complex than ever, and becoming more so every day.
Driven by advances in technology, computing power, and the Internet, an accelerating pace of change is disrupting an ever-increasing number of companies, industries, and sectors, such as retail, media, consumer products, and healthcare. This makes it extremely challenging for many companies to keep pace in strategy and execution. Technology is enabling consumers and businesses to easily compare prices for products and services, putting pressure on companies to consistently demonstrate value for money. The global COVID-19 pandemic has accelerated this development through the rapid adoption of online services and a widespread shift to telecommuting.
This rapid pace of change provides opportunities for active managers to add value through careful analysis to identify companies which are successfully navigating these seismic shifts, both among the disruptors and the disrupted, while avoiding companies in structural decline.
As technological developments create an environment where an increasing number of companies are finding it difficult to generate stable or rising cashflows and earnings, a disciplined, robust, and risk-controlled approach can enable an active fund manager to select and own companies which are adapting successfully.
Focusing only on the rear view mirror, using criteria such as market capitalisation-based indexing, places an investor at a comparative disadvantage relative to forward-looking analysis intended to understand the outlook for a company and its competitive position. Identifying whether a company has a sustainable competitive advantage enables an active fund manager to look through short-term market noise to focus on longer-term drivers of value creation.
Active fund managers attempt to add value by building portfolios of companies which are different from a market index benchmark. One important concept to understand here is that of ‘active share’, or the extent to which a fund’s portfolio differs from the index. A low active share score indicates that the fund closely resembles the index, while a high active share score indicates considerable differences between the fund’s portfolio and the index. (Fund managers which purport to be active but whose portfolios closely resemble an index are sometimes referred to as “closet indexers”.)
A key academic study concluded that funds with the highest active share scores outperform their benchmarks significantly – in other words, the most active stockpickers are likely to outperform their benchmarks, even after fees.
Low turnover is another key attribute of successful active management. Turnover is the percentage of a fund’s assets that are traded each year. In the same way that high fees reduce investors’ returns over time, so the trading costs involved in a high turnover active portfolio also reduce investors’ returns. Research among U.S. share funds has shown that active strategies which have high ‘active share’ profiles combined with lower portfolio turnover are more likely to generate stronger longer-term performance.
Less Visible Benefits of Active Management
The market conditions a company operates in and its customers, competitors, and suppliers are constantly changing. An active fund manager is able to apply its research process to ensure that a particular company still represents the most attractive investment opportunity available, or if the situation is changing, to deploy the capital more effectively elsewhere.
By doing this, active global equities fund managers play a valuable role in determining the value of businesses, and in the efficient allocation of capital. Without active management, the prices of global companies would be based principally on their market size, without any mechanism for deploying capital where it is most likely to earn the highest returns, and therefore maximise the potential benefit for economies and societies.
As well as the direction of capital into faster-growing industries, sectors, and companies, and away from those in decline, the scrutiny and ‘stewardship’ role of active fund managers and their engagement with company management can also contribute to greater transparency and higher standards of company behaviour and corporate governance.
There is certainly a role for passive investing in global equities. Partnering a passive allocation with an active approach with a high ‘active share’ profile can, for instance, potentially create a powerful combination which can ultimately help investors generate higher returns and achieve their investment objectives.
However, the increasingly complex investment landscape makes an active approach to global equities investing which can navigate this dynamic environment of change and disruption extremely desirable. An unconstrained investment strategy with high active share characteristics, low turnover, and a judiciously selected tight collection of companies, underpinned by sound risk analysis, can provide investors with attractive opportunities for long-term capital growth, portfolio diversification, and favourable outcomes from investment in global equities.
*The Fund performance quoted is the performance of the unlisted class of units in the Global Equity Fund and may be a useful reference point for the new quoted class of units in the Fund. However, you should be aware that the quoted class of units in the Fund is new and has no performance history – the past performance for the unlisted class of units in the Global Equity Fund is NOT the past performance of the quoted class of units in the Fund. Past performance is not a reliable indicator of future performance.
The information in this article is provided for general information purposes only and does not take into account the investment objectives, financial situation or needs of any person. Investors Mutual Limited (AFSL 229988) is the issuer and Responsible Entity of the Loomis Sayles Global Equity Fund (‘Fund’). Loomis Sayles & Company, L.P. is the Investment Manager. This information should not be relied upon in determining whether to invest in the Fund and is not a recommendation to buy, sell or hold any financial product, security or other instrument. In deciding whether to acquire or continue to hold an investment in the Fund, an investor should consider the Fund’s Product Disclosure Statement, available on the website www.loomissayles.com.au or by contacting us on 1300 157 862. Past performance is not a reliable indicator of future performance. Investments in the Fund are not a deposit with, or other liability of, Investors Mutual Limited and are subject to investment risk, including possible delays in repayment and loss of income and principal invested. Investors Mutual Limited does not guarantee the performance of the Fund or any particular rate of return. MALR027834